Vietnam’s local sovereign bonds are set for their biggest monthly loss since November amid a run of failed auctions and speculation authorities will devalue the dong.
The yield on the three-year notes rose 44 basis points in April to 5.56 percent, according to a daily fixing from lenders compiled by Bloomberg. Vietnam’s export competitiveness has been eroded as the dong only weakened 2.2 percent in the past year, compared with declines of 10 percent in Indonesia’s rupiah and Malaysia’s ringgit.
HSBC Holdings Plc predicts a devaluation, which would be the third in less than a year, to support overseas sales as the government seeks to boost growth to 6.2 percent in 2015 from 5.98 percent last year. Sovereign bond auctions are failing because the government has only offered tenors of five years or more, rather than the more popular shorter-dated securities, according to Ho Chi Minh Securities Corp.
“Big players in the bond market, like the big banks, are migrating to hold dollars,” Alan Pham, the Ho Chi Minh City-based chief economist at VinaCapital Group, the country’s largest fund manager, said in an interview on Thursday. “The FX market isn’t stable with widespread expectations of another devaluation.”
Vietnam devalues the dong by adjusting its daily reference rate, which the currency can trade as much as 1 percent either side of. Central bank Governor Nguyen Van Binh said in December that he planned to adjust the rate by as much as 2 percent during 2015, before cutting it by 1 percent on Jan. 7.
A devaluation makes imports more expensive and fuels consumer-price gains, damping demand for the relative safety of government debt. Inflation accelerated for the first time in nine months in March, to 0.93 percent.
Vietnam’s export growth has slowed in the last four months, falling to a five-year low of 6.9 percent in March.
The State Bank of Vietnam will probably implement one more devaluation this year, Trinh Nguyen, an economist at HSBC in Hong Kong, said in an interview on Thursday. Pongtharin Sapayanon, a fixed-income fund manager at Aberdeen Asset Management Plc in Bangkok, said Thursday that he expected a depreciation of no more than 2 percent.
“While exports are still growing, the pace has slowed in the face of a more competitive euro and yen,” said HSBC’s Nguyen. “Given that the economy is export dependent, in that it made up 81 percent of gross domestic product in 2014, Vietnamese goods are being hurt relative to their peers.”
The State Treasury sold just 13.5 percent of the 2 trillion dong ($93 million) of 15-year bonds it offered on April 16, according to the Hanoi Stock Exchange. Only 1 percent of the 3 trillion dong of five-year notes offered on April 13 found buyers and there was no issuance at all from an auction of 1 trillion dong of 10-year securities on the same day.
That came after sovereign sales dropped 37 percent to 56 trillion dong in the first quarter from a year earlier, according to the Ministry of Finance. The government is targeting 250 trillion dong of issuance this year. If sales don’t pick up then state spending on infrastructure will be squeezed, threatening the growth goal, said VinaCapital’s Pham.
Vietnam’s banks will increase lending by 17 percent this year, according to a central bank survey released this week, compared with loan expansion of less than 13 percent last year.
The rising credit growth is also sapping demand for government bonds, as banks are shunning the debt so they can lend more, said Nguyen Minh Duc, the Hanoi-based fixed-income director at Ho Chi Minh Securities.
“If the government keeps sticking to its bond sale plan on five-, 10- and 15-year notes, the market will be most unlikely to absorb all the bonds offered,” he said in an interview on Thursday.
Vietnamese sovereign notes have surged over the last three years as the government reined in inflation, which exceeded 10 percent in April 2012. The five-year yield fell 489 basis points, or 4.89 percentage points, to 5.94 percent. That compares with a yield of 7.46 percent for similar-maturity notes from Indonesia, which is rated four levels higher by Moody’s Investors Service.
“Yields are still very low historically speaking and psychologically it may be hard for the market to buy into that Vietnam has entered an era with lower and less volatile yields,” Dan Svensson, Vietnam debt fund manager at Dragon Capital Ltd. in Ho Chi Minh City, said in an interview on Thursday. “If the economy is picking up then people may be looking to place their money in equity and property markets.”
The VN Index has rallied 4.1 percent since this year’s low on April 1. Property transactions in Hanoi more than doubled and those in Ho Chi Minh City tripled in February from a year earlier, figures from the Vietnam Real Estate Association show.
“The recent weakness in Vietnamese bonds can be attributed to the potential devaluation,” said Aberdeen’s Pongtharin. “But yields may continue to see upward pressure for much of this year should credit growth recover.”